The problem of Medicare: A doctor comments

Stanley Farb is a retired physician who splits his time between New Jersey and Florida. He's been sending me some e-mails on the Medicare issue and he included this column he wrote on the subject.

However you feel about the issue, this is a good overview of the long-term problems with Medicare's finances. Note particularly his observation that the laws of supply and demand don't apply to Medicare.

A DOSE OF MEDICARE REALITY

by Stanley Farb, M.D.

With health care a major concern of voters over age 65, they need to take a realistic look at Medicare. Prior to passage of the Health Care Act of 2010, reliable estimates confirmed that Medicare could not remain solvent beyond 2017. If provisions of that legislation are implemented, a dubious proposition considering the dissatisfaction with it, Medicare financing should remain solvent an additional 12 years. So Medicare as we know it is on an unsustainable trajectory.

Following passage of Medicare in 1965, costs soon surpassed estimates since the government agreed to reimburse hospitals based on cost and physicians based on " usual and customary " fees, in effect removing any incentive to be cost efficient. As Medicare costs ( and medical costs in general ) outstripped the inflation rate each year, reimbursement caps were put in place.

Attempts to control costs by enrolling Medicare participants in privately managed programs such as HMOs and Medicare Advantage have been unsuccessful. While most of us assume that private industry is more efficient than government bureaucracy , this is not true for health benefit administration. Medicare runs a 3% rate for these costs; private insurers average 15 - 17%.

A major reason why medical costs are so difficult to manage is that the laws of supply and demand do not apply to the health care industry. An increase in the number of physicians results in more patient visits and more tests. Hospitals do not compete on price; but do spend freely on equipment and advertising to maintain market share in their community.

The Medical Prescription Drug Act of 2003 points out the difficulty in predicting costs and in initiating fiscal restraints. The initial estimate for the cost of this legislation, $400B over ten years, had already escalated to $530B after three years in operation. This Act contained the proviso that the government could not negotiate drug prices. Yet another arm of the government , the Veterans Administration, is able to get sizable discounts since it is permitted to negotiate price.

Having pointed to the government, private insurers, hospitals and doctors as possible contributors to the untenable Medicare financial situation, there remains one more group of enablers -namely, those of us who participate in Medicare. Most seniors incorrectly assume that we have paid for our Medicare benefits. Above and beyond the funding that comes from payroll taxes and premiums paid by participants, 40% of the cost is funded by tax dollars. It is with good reason that I periodically thank my children and grandchildren for their contributions, present and future, toward my medical bills.

The subject of cost rarely comes up with Medicare patients since their care is covered. While many seniors complain about the high cost of tests and treatment received, they have little motivation to check their medical charges for accuracy. Last year I underwent a minor outpatient procedure that was submitted to Medicare as a very expensive major surgery. I reported the incorrect charge and the error was rectified. I suspect that most patients do not bother to question billing errors. Many otherwise reputable hospitals and health care providers have reimbursed Medicare millions of dollars for improper over-billing. The best estimates put Medicare fraud at over 10% of all expenses. Wringing waste out of the system would help stabilize Medicare financially.

While each of us wants the best available care , more is not necessarily better. A study reported in the Annals of Internal Medicine compared Medicare patients in the highest cost regions of the country with those in the lowest cost areas. The study concluded that " More visits to the doctor, more tests, more treatment by specialists and more hospitalizations do not result in lower mortality rates or in improved health."

Any attempt to put Medicare on a financially stable, sustainable basis will have to include a willingness on the part of recipients to take a more active role in their own health care management. The 30% of spending that now pays for services which do not improve the quality of life or outcomes must be significantly reduced. Princeton Professor Uwe Reinhardt, a leading health care economist, recently acknowledged that rationing will be a necessary component of lower health care spending. While any mention of rationing has been a flashpoint for both politicians and voters, it can be sensibly introduced by having panels of medical experts set standards of care that eliminate tests and services of little benefit.

Introducing the medical practice paradigm of lower cost Medicare regions to those at the high end would go a long way toward solving the Medicare deficits without appreciably reducing the quality of care. Those of us who benefit from Medicare must become more knowledgeable regarding the care we receive and more active in the discussion to put Medicare on a stable financial footing.